Strategic Second Sourcing by Multinationals

Multinationals often serve foreign markets by exporting as well as by investing directly in foreign production facilities. We argue that if the multinational competes in an oligopolistic market characterized by strategic complements then there are strategic reasons to use two production facilities - committing to a second source allows the firm to keep average cost low while increasing its marginal cost. The increase in marginal cost softens product market competition resulting in higher profits. We argue that this theory also has implications for the "make or buy" literature in production management and the literature on second sourcing in industrial organization